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With ESG an increasingly pressing concern, charities need to be ethically sound to ensure they survive into the future.
Last updated: 01 Dec 2020 8 min read
It’s estimated that the coronavirus crisis will cost charities in the UK as much as £4bn in the 12 weeks to mid June. While the government’s pledge of a £750m pot to support charities will help many continue their vital work in the short term, voluntary organisations need to work harder than ever to ensure their sustainability in the years to come.
As well as donations, grants and other sources of income, one of the most effective ways for charities to fund their work is through investments. This can maximise charities’ funds over the long term and generate a regular income to support and expand their activities.
Charities’ investments depend on their objectives and needs, whether that’s immediate access to funds, longer-term spending commitments or funds for emergencies. Many investments, especially by charitable foundations, are endowed funds that have been donated to support a specific cause over the long term. Charities can also opt for programme-related investment, which supports the delivery of a charitable purpose as well as offering a possible financial return.
But even setting aside the issue of coronavirus (if such a thing is possible), charities are coming under increasing scrutiny from supporters, grants bodies and other stakeholders to invest in companies that promote responsible environmental, social and corporate governance (ESG). This enables charities to practically support the planet and its people (and be seen by supporters to do so) and provides an effective measure of the invested company’s own sustainability and ability to continue to provide a sound return for years to come.
“Our investments are absolutely vital to the conservation work we do,” says National Trust director-general Hilary McGrady, “but they have to be aligned to our mission to protect special places forever.”
Last summer the trust announced a more ESG-focused investment strategy after the press reported its portfolio included fossil-fuel companies – which surprised and angered many donors to a charity with a commitment to conservation and preservation.
“None of us liked reading those headlines,” McGrady told supporters. “We hear your feedback loud and clear and will stop investing in fossil-fuel companies.”
The National Trust had actually been reducing such investments for a while, with a previous policy that forbade it from putting money into companies that derived more than 10% of their turnover from the extraction of thermal coal or oil. In practice, before the announcement, only 4% of its indirect investments were in fossil fuels – but the ire of the trust’s supporters, and its potential implications, was sufficient to reduce that to zero.
“We are a conservation organisation and so are rightly held to account about the environmental impact of everything we do,” admitted McGrady. “We know this is a complex issue and we are learning, along with the rest of the world.”
Everyone wants a greener world, and public and government commitments to tackle climate change have changed immeasurably over the past five years. But there is an inevitable debate about whether charities have an obligation and moral duty to try to get as much financial return on their investments as possible, or back greener, more ethically sound companies, even if that means a significant drop in that return.
Current guidance from the Charity Commission (which was last updated in 2016) is that “the purposes of the trust will be best served by the trustees seeking to obtain therefrom the maximum return, whether by way of income or capital growth, consistent with commercial prudence” rather than trying to conform to “a supposedly homogenous ‘public opinion’.” It does allow charities to invest ethically, but suggests this can only be justified if the invested business doesn’t conflict with the charity’s aims, such investment doesn’t alienate supporters or beneficiaries, or “there is no significant financial detriment”.
But many charities are calling for a clearer legal ruling that more clearly reflects the public’s increasing expectation of responsibility to the planet. A coalition of 20 charitable organisations, including the 14,000-member National Council for Voluntary Organisations, recently asked the attorney general and the Charity Commission for England and Wales for a legal ruling on whether “the public benefit of charities means they should be required to align their investment policies with their own objectives and commitments to wider society”.
Sian Ferguson, who represents three Sainsbury Family Charitable Trusts that backed the campaign, and have recently taken their £100m investments out of fossil fuels, said: “The trustees were frustrated that the advice they were given suggested they didn’t need to think about where their investments were and should just concentrate on giving. That didn’t make sense because some of their investments were causing the problems they were trying to solve.”
Charities wanting to be seen as promoting sustainability may need to do more than just look at their investments. A recent report claimed that, of the UK’s largest fundraising charities, just three – Cancer Research UK, Oxfam GB and the Royal National Lifeboat Institution (RNLI) – had publicly available corporate responsibility (CR) policies, only 10 had a named sustainability lead and just 13 had an employee whose role involved CR.
Matching Method to Mission, published by social change PR agency Forster Communications, concluded after examining the charities’ annual reports, websites and LinkedIn profiles that “clearly the disciplines of sustainability and corporate responsibility have barely made a dent in the cultures of the UK’s largest charities”.
The report added: “Whether it’s not being more inclusive in their hiring, not paying a living wage or using suppliers that are flagrantly contributing to climate change, those day-to-day decisions have huge knock-on effects. They mean the charity is not meeting the public’s expectations.”
Katie Buchanan, head of sustainability at Virgin Media, warned in the report that charities that remained behind the curve risked alienating potential business partners with a focus on corporate social responsibility (CSR). “Social sector organisations need to give the same attention [as CSR-focused businesses] to how they conduct themselves, otherwise they may find it difficult, if not impossible, to find progressive businesses to build long-term, sustainable and productive partnerships. Ultimately, charities don’t have a monopoly on creating social change and businesses may choose to take on a social issue without them.”
“Our investments are absolutely vital to the conservation work we do, but they have to be aligned to our mission to protect special places forever”
Hilary McGrady, director-general, National Trust
At the RNLI, sustainability manager Anna Frizzell says: “We are working hard to fully integrate sustainable principles and ways of working so we can save lives at sea indefinitely. We already have a really positive impact on many people and communities, but it’s how we do this that makes a difference to the future of our service.”
The institution’s sustainability plan sets out short-, medium- and long-term goals against local, national and global issues. It includes: protecting the environment through maximising energy and fuel efficiency, using renewable technologies and eliminating waste (it has ditched plastic and recycles all its life jackets); creating, developing and protecting a diverse workforce through a range of initiatives and policies, improving the safety and physical and mental well-being of its staff and volunteers; and a commitment through its supply chain to eliminate modern slavery and human trafficking.
“We’re always looking for more solutions to make the RNLI more sustainable,” says Frizzell. “We’re absolutely committed to ensuring our supporters’ donations are spent wisely.”
Unsurprisingly, the RNLI also ensures its investments are ethical in terms of ESG policies – it constantly monitors the managers of its active funds, who are all signed up to the UN’s Principles of Responsible Investment. And, although the charity says it cannot influence the investment managers’ individual discretion, the RNLI would have no hesitation “to withdraw from any pooled fund if we identified an investment that conflicted with our charitable objectives”.
In response to the coalition’s call, the Charity Commission published a blog – its preferred method of communication – in January, asking for organisations’ views on how the balance might be achieved. It did, however, say “it will always be for trustees to decide what is right in their specific case, and what that means in practice will vary between different charities… What is of principal concern to supporters of a health charity will differ to that of a conservation charity, and the balancing act will play out in different ways…. what is ethical may not always be universally accepted.”
But it says charities need to look at a raft of different ethical responsibility measures. “This is not solely about climate change,” said the blog. “A range of social and other issues, such as human rights records or treatment of workforce, may need to be considered if a charity is to live out its values.”
Charities and Third Sector